March 30, 2011

The launch is significant in many ways, while underwhelming in others. Overall, I think it’s a net positive for the market and for consumers but a bit of a speedbump on where I think they need to go.

Cloud Drive is a “music locker”. In other words, it’s a cloud-based storage system that allows users to store music they own in the cloud. In that sense, it’s very different from either iTunes (local storage) or streaming music apps like Rhapsody, Spotify, Rdio or even Pandora.

Music Lockers are hardly new. MP3.com launched back in 1997 and there have been other efforts since. The music industry sued (after all litigation takes less effort than innovation) and the small companies were destined to fail as a result.

With this new effort, the music locker model for the first time has a deep pocketed sponsor behind it, with Google and Apple (begrudgingly) likely to follow suit.

First the good news:

Amazon has placed a stake in the ground saying that they do not need permission from music publishers to enable users to store and access their music in the cloud. That’s a good thing for consumers and for the market as a whole. With Google and Apple likely to follow, this makes for a more competitive landscape for music.

Amazon digital downloads are DRM-free, so you’re not locked into any one provider. It will also put pressure on Apple to make all of their content DRM-free. This is something the record companies will fight (after all, in the past they’d gotten me to purchase vinyl and CD versions of Blonde on Blonde and would want me to keep doing so every time my music system changes) but it has to happen.

Amazon gives you 5 GB of storage for free and will bump that to 20 GB free for the first year if you buy any digital music through Amazon. That’s a smart move. Amazon has done a lot to try to break through in this space, offering a free daily download of holiday songs during December, as well as other promotions along the way. But it still is more difficult to use than iTunes. I buy most of my music via Amazon but my daughter mostly uses iTunes and my wife just asks me to get her what she wants.

Now the Bad:

To start, I’m not a fan of the music locker model at all today. It seems that streaming is a much more compelling solution for consumers AND the music industry. More on that below. But first, a few specific points about the Amazon solution:

It’s obvious that this is an effort to make Amazon a more viable competitor to iTunes. And that’s a good thing. I already buy most of my digital downloads through Amazon. But 5 GB (or even 20 GB) is hardly going to hold my music collection. I’d need the 100 GB plan, which costs $100 per year. That’s nearly the cost of a year’s worth of Rhapsody Premier.

I’ve got about 25 GB worth of Amazon digital downloads already. But there doesn’t seem to be any way to automatically have that music show up in my digital locker. It seems that I have to upload those files back to Amazon. That’s a lot of work for me (and doesn’t seem an effective use of Amazon’s bandwidth, as they could easily move it around on their own servers).

The functionality of the Cloud Player itself is meh. Gee, I can pick by artist, album, song or genre, or build a playlist. Hey, it’s the identical functionality that came in my iPod. My first iPod. Nearly ten years ago. Where’s the innovation, Amazon? Where are the social and music discovery aspects that I find in basic services like Spotify, last.fm, Grooveshark or Pandora, not to mention things like Listening Room, Imeem or other new apps? I’m a believer in Reid Hoffman’s rule #6 – “launch early enough that you are embarrassed by your first release” but not in a mature market like this. If Amazon wants to displace iTunes, it needs to show innovation (or at least show the ability to copy the innovation of others).

But back to the key point

Whether or not Amazon delivered on some of the functionality I’ve outlined above, the key point is that they missed the model. I’m not that keen on the idea of music lockers at all. A music locker is basically just a continuation of the model we’ve had for music for 100 years. Whether buying vinyl, 8 track, cassette, CD or downloadable digital tracks, the model remains the same. I purchase music to own, rather than paying a subscription fee to access music. That model just doesn’t make a lot of sense in a digitally connected world. Why should I have to make a “commitment” to an album just because I want to hear it now? There’s just as much money to be made in a well-managed streaming service and it’s much more consumer friendly in the long run.

I’m still hoping for a meaningful Spotify US release. I use them extensively when I travel and would gladly pay for a Spotify service here. In the meantime, I’ll continue to use a hybrid of Amazon digital downloads on my iPhone and a mix of Rhapsody and Pandora for streaming.

March 26, 2011

Barry Ritholtz had an interesting post this morning, posing the question of whether Best Buy had simply become Amazon's showroom. This is a topic I've discussed with a number of people in the past 6-12 months - what is the future of brick and mortar retailers in a world driven by ecommerce?

Already today there are a number of product segments where physical stores are irrelevant. Music is the obvious one. It's much easier to discover, explore and purchase music online than offline. And since the primary use of CDs now is to burn them to get music onto your iPhone or iPod, the physical media just becomes an unecessary step.

The same applies to books. A few years ago, I'd wander into a Borders (BORD) or Barnes & Noble (BKS) to flip through books, then once I'd decided which to buy, I'd typically order it from Amazon (AMZN), as the cost savings was typically 20-40%. Today, that browsing step is largely unneeded. The other day I wanted to pick up an introductory book on Python programming. After reading Amazon reviews, I narrowed it to three potential choices, downloaded the free first chapter of each onto my iPad, then bought the one I liked best.

As the Ritholtz post points out, the most effective and economical way to purchase electronics is to look at or listen to them at a Best Buy, then order them from Amazon. With free shipping (especially for Amazon Prime customers), aggressive prices and favorable return policies, there's little benefit to buying them at a physical store. The one possible exception today is big screen TVs where Best Buy (BBY) can provide value add through installation and setup.

The only barriers to this model that stores have today are either impulse purchases (you'll see the typical item on the checkout line has a huge markup - a USB hub that sells for $18 at Amazon was priced at $30 at Best Buy) or price ignorance. That $30 USB hub might have seemed attractive had I not been able to find the Amazon price using my iPhone. As more users have smartphones, it will be harder for retailers to count on ignorant consumers.

So, what will happen to the brick and mortar stores going forward? Some, of course, will simply vanish, following in the footsteps of Tower Records, Blockbuster and Borders. Others may develop more value-add services that help drive sales (tailoring for clothes, etc), while I think we may see a new "showroom" category emerge.

There are definitely products that you need to physically see before purchasing. Luggage is a good example. You can take three different 21" upright wheeled bags with the same approximate capacity and they will be arranged very differently. Ebags and its peers do a good job, but I think most people will want to see how their stuff will fit. The same applies to a lot of clothing. My wife walks through women's clothing stores touching all the materials before picking something out. I can order shirts or slacks online at Brooks Brothers but for many items, especially women's fashion, there is a need to touch the item first.

But you don't need to stock a complete inventory of every size for this. A showroom, where users could see and feel the items, could drive a lot of sales. I wonder if the economics could work to enable mall showrooms which are really just "super affiliates" for Amazon. I don't think the standard Amazon affiliate commission would cover all the costs of an offline presence, but if there were a higher affiliate rate I don't see why it couldn't work for select items.

Another area where this could work would be eyeglasses. I find it obscene the markup that LensCrafters and other vision stores charge on a pair of glasses. More outrageous is the "with and without" insurance rates - where they offer special pricing but not with your insurance coverage. So, while my daughter's primary glasses come from Lens Crafters, she buys her spare pairs (camp, prescription sunglasses, etc) from Zenni Optical. Optically, the Zenni glasses are the equal of the mall store versions, but they're priced at $20-40 rather than $300-400. The frames vary in quality but are solid overall. But the problem is that it's really hard to choose a pair of eyeglasses without trying them on first. My daughter will try on 12-15 pair before selecting the ones she likes. So, it would make sense to open mall kiosks that act as Zenni affiliates. Try on all the frames, pick the pair you like, provide your prescription and have your glasses shipped to you in a week for about 10% of the cost you would have otherwise paid.

To be economically feasible, showrooms may have to be funded in part by manufacturers (as they are in the automotive industry). But, between manufacturer incentives and affiliate programs, there's certainly room for this new model.

March 21, 2011

Twitter turns five today. The company has grown at a rate that most can only envy. Critical to that growth has been the development of an ecosystem around it. But Twitter’s relationship with its ecosystem has always been a bit shaky.

Concerns about the future of the Twitter ecosystem began last spring when Twitter acquired Tweetie and began to launch its own mobile applications. Later, Twitter enhanced its website in an effort to drive more usage through the site, as opposed to third party apps. A month ago, third party Twitter apps UberTwitter and Twitdroyd had their access to the Twitter API suspended as a result of a trademark debate and other “policy violations”.

Last week, the debate hit a tipping point when Platform lead Ryan Sarver shared that developers should not “build client apps that mimic or reproduce the mainstream Twitter consumer client experience”. In other words, don’t bother building new client apps like Tweetdeck or UberTwitter.

Ecosystems are critical for the growth of platforms. Google is the obvious example, but Salesforce.com has its Dreamforce program, Facebook has cultivated an ecosystem, while traditional software companies like Microsoft or SAP could not have grown as quickly without the systems integrators and third party applications that sprung up around them. But ecosystems cannot thrive on their own. As in the biological world, they require nurturing and cultivation. For technology companies, that means ongoing communications and behavior consistent with that message.

As a developer, becoming part of the ecosystem has its benefits but also many negatives. The obvious risk is that your success is tied to that of the underlying platform. Beyond that, you run the risk that the platform will see your functionality as a critical part of the core, and embed those capabilities into their own applications or APIs. Of course, the platform could even shut off your API access, or more subtly, remove data you depend on from those APIs.

Investors are even more cautious, wanting to be certain they are funding a real company, and not simply a cool feature that will eventually be embedded into the platform.

For the platform, cultivating an ecosystem is not easy. Inside the company there are always many arguments against it. It often seems like a zero-sum game, where every dollar (or ad impression) that goes to a partner is one that the platform does not receive. Developers often believe they know what’s best for the user and that third party apps may not present the underlying platform as well as they would. But a thriving ecosystem helps drive adoption and creates much greater barriers to entry for others. And while your platform developers may have some ideas on how people will use the platform, it’s much more likely that other use cases will spring forth from having many 3rd party apps.

So, what does Twitter need to do?

First, it needs to build a stronger relationship with the developers in its ecosystem. And a starting point would be to have a single point-person focused on that. When I first tweeted the idea that Twitter needed an ombudsman, I got an @reply from Dick Costolo, Twitter COO. Dick’s a great guy and I was thrilled to know that he was listening, but he is clearly focused on the advertising side of the business and has enough fallout from the so-called #dickbar that he can’t be the key contact. Ryan Sarver owns the APIs and is a great technologist, but he’s not focused on communications. I think they would be well-served having a point-person focused on the ecosystem, much in the way that Matt Cutts is the key Google spokesperson on SEO-related issues.

The next key thing would be to meet with some of the developers and based on those conversations, share the basic philosophy of how Twitter plans to work with the members of its ecosystem.

A platform has a lot of flexibility in determining how they want their ecosystem to grow. They can have a very open approach or a more closed one as Apple does. But the key is strong and consistent communications, no surprises and keeping the API open so that new features available on the core platform are all exposed through the API.

I’m optimistic about Twitter’s future. I don’t see the latest ripples as a death knell, as Alexandra Samuel suggested in her well-thought out HBR post last week. But I think it critical that Twitter begin to engage its developer community on a much more active level to ensure that success.

Felix Salmon notes how confusing the model itself is, creating many distinctions that are far from intuitive.

Emily Bell, who had hands-on experience leading digital content for the Guardian, estimates that only 5% of NYTimes.com visitors will ever hit the paywall, believing the focus on the paywall will actually hasten the decline of these newspapers.

One of the few optimists is PaidContent, which project revenues of $100m based on the prior experience with the inferior Times Select model.

I think the answer will fall somewhere in the middle. While I think pay walls will be a failed experiment for most publishers, I think the Times will probably do OK with this model, at least for the near term.

So, what did the Times get right?

First, they made sure not to cut off the flow of traffic from social media and other links. Unlike WSJ.com where only links from Google are free, any visits to the NY Times site driven by a link are free. Of course, if you click off that page to another Times page, the meter starts, but there’s no disincentive for bloggers or end-users to link to Times content.

Second, they rewarded their active users with an introductory offer. Felix poked fun at this, suggesting these were the users most likely to pay anyway, so there was no need to give them a deal, but there’s something to be said for showing favored treatment to your good customer. Looking at it another way, there’s little that irks customers more than when a longtime customer has to pay full price but new signups get special deals.

Third, and perhaps most importantly, they know their core readers fairly well. There remains a generation (or two) of people who were brought up believing that they must read the New York Times every day. This is partly a defensive move, of course, but the Times will be able to lock in a core part of their existing revenue base under this plan. Some print readers who may have dropped off in the coming months or years may stick around a bit longer, while others who have made the shift to digital only are likely to pony up for a subscription.

This was not a bold new plan from the Times, but it’s one that addresses their short-term needs without gutting their future. Had they turned to an impermeable wall, they would have done substantial damage to their web presence and their long-term future. Instead, they took modest steps which should generate some incremental revenue while protecting their core.

Yet before others go off to copy the Times, it’s important to remember that the Times is different from other newspapers. It’s the only truly national newspaper and remains the “publication of record” for many people in the New York area and beyond. Just as the Wall Street Journal and Financial Times are unique in the large percentage of readers who treat it as a business expense, the Times is unique in the devotion of its readers. Local papers around the country expecting to copy the model may be disappointed in the results.

Level 1: I follow at least a few dozen people and have a few dozen followers myself. I tweet occasionally but often can go a week or two between tweets. I'm still not quite sure what all the excitement is about, but since a few of my friends are on Twitter, I don't want to be left out. I follow back everyone who follows me (though some of them are bots).

Level 2: I tweet several times per week and have used both the RT and @reply functions. I'm starting to find Twitter to be a useful way to find interesting information I may have otherwise missed. I rarely if ever see an "I just farted" tweet in my stream.

Level 3: I tweet regularly and have begun to engage via Twitter with others. I retweet interesting tweets, reply to others regularly and have *met* people in my industry via Twitter whom I would not have otherwise met. I am careful about whom I follow. My follower:follows ratio is at least 2:1 if not higher. Twitter has become an important part of my news stream.

Level 4: I use Twitter on both desktop and mobile. Twitter was the first place that I turned for insight on the Egyptian uprising and the Japanese earthquake and tsunamis. A day rarely passes where I am not retweeted or have a conversation on Twitter. I know my @klout score and view Twitter as my primary source of real-time information.

These might not be the ideal measures of Twitter usage, but they're a starting point. I'm sure the team at Klout could provide more perspective. But seeing usage stats on the growth of Twitter using this classification would be significantly more useful than what Twitter have released today.

March 08, 2011

Every media executive I’ve ever worked with has talked of the importance of “owning the customer”. Of course, as I’ve written about previously, all too often publishers use that description when, in reality, they have little relationship with their readers. As eBooks become the dominant format and Apple and Amazon the key platforms, this tenuous relationship becomes even more frayed.

The event is a hybrid model – more structured than an unconference, but with the interactivity and participation not found in traditional conferences.

For the “End Customer” exercise, the organizers have set a very realistic framework for discussion. Participants will look ahead to 2020, an environment where publishers have little choice but to market directly to end users. The exercise will explore ways in which publishers could build a database of customers and engage them on an ongoing basis.

This is one of three participatory exercises at the BISG NEXT event. The other two focus on the Core Business, and one near and dear to my heart - Mobile Strategy. I’ll cover more details on these in upcoming posts.

March 01, 2011

The chart of the day yesterday was one from the Technium blog that showed that if you project forward Amazon (AMZN) price cuts on the Kindle, that it would essentially be free by November, 2011.

Of course there's no guarantee that prices will continue to drop at the prior rate. If we simply extrapolate from past cuts, we could wait until sometime in 2012 when Amazon would, theoretically, pay us $100 to take a Kindle of their hands.

I don’t see Amazon cutting the Kindle price to zero, at least not on a wide-scale basis. There’s no need to do so. What they need to do is get it to the point at which it becomes an impulse purchase. For consumer electronics, it's generally accepted that once an item gets priced below $100 it becomes that impulse purchase. We've seen that with iPods, digital cameras, Flip video cameras, portable DVD players and more.

Yesterday, Amazon announced that AT&T Stores would begin to sell the Kindle 3G, joining Staples and Target as brick and mortar resellers of the eReader. This is very important strategically for Amazon. For, despite the structural disadvantages of its brick & mortar business, Barnes & Noble actually has an advantage over Amazon in selling eReaders. It has readers coming through its doors to buy books, who can pick up and play with a Nook, determining whether it’s a fit for them. While most readers of this blog have probably held an eReader in their hands, I’d guess that 90% of the book-reading public have never done so. I still hear people (who’ve never held one) say “I couldn’t read on something like”.

So, the challenge for Amazon is to get the Kindle into as many hands as possible.

TechCrunch has recently shared an offer that Amazon has made to select customers: buy a Kindle and if you're not happy, get a full refund, while keeping the Kindle. This offer was made to a select group of active book buyers at Amazon.

More recently, they've shared a rumor that Amazon will soon offer a free Kindle to all Amazon Prime subscribers. That would increase the value of my $79 Prime subscription, to which streaming video downloads have recently been added. If they can afford to do it, it's a smart move for Amazon for three reasons:

It will increase the renewal rate for Amazon Prime by adding more value.

It will lock users in to the Kindle platform for their eBook purchases.

It will actually decrease Amazon shipping costs, as books that were eligible for free shipping with Amazon Prime will now be downloads instead of boxes.

I could see Amazon taking one more approach to getting Kindles out there. Why not follow the approach of the "continuity programs" that book and music publishers used in the 70s and 80s, to package a Kindle with a commitment to buy eBooks?

Remember the Columbia House record deal? Was there anyone in the 70s who didn't take advantage of the "12 albums for a penny" offer?